The Secret Cost Baked Into the Price of Everything? It's People

By Derek Thompson

For most of the last century, we were the growing stuff economy and the making stuff economy. In 1900, 40% of Americans lived and worked on farms. In 1950, 40% of Americans worked in manufacturing. But today, we're the doing stuff economy. Nearly 100% of the net growth in employment in the last 20 years has been in services, led by government, health care, and other cubicle work.

The first implication of this evolution from growing to making to doing shows up in jobs numbers. Manufacturing's share of employment has fallen 60% since 1972, Planet Money reports. Agriculture's share is bobbing around 2%. What a difference a tractor makes.

The second (and, I think, the most interesting) outcome shows up in prices. Prices, as I've written, are people. Human-work costs money, and the more human-workers you need to complete a task, the harder it is to make that task cheap. Hand-stitched bags are more expensive than robot-stitched bags. If you own a closet full of purses, you're way ahead of me on this observation.

The easiest way to make something cheaper to replace American labor with cheaper labor -- that is, hardware, software, or cheaper foreign workers. Agriculture has replaced 95% of its labor force (as a share of the economy) thanks to farm mechanization. Over the same time, families could afford much more food.

But here's the really interesting part: While relative spending on food and drink has declined, the portion of our food and drink spending going to farmers declined, too. Farming has become even more efficient and productive than grocery market prices reveal. That's because,increasingly, when we buy food, what we're really paying for are the business services required to market and distinguish it.

Consider $1 of food spending. In 1967, 26 cents of it went to farmers and manufacturers. Today, that share has fallen to 16 cents, economist Stephen Rose has reported for The Atlantic. In 1967, only 6% of food spending went to the service sector. By 2007, the number of people working in business services quadrupled, and their share of our food spending doubled. As the economy moved from growing stuff to serving stuff, farmers lost 7% of their share of the food market and restaurants ate up nearly the same portion.

Yep, prices are people. "Baked into the price of everything we buy is the rising
cost of advertising, accounting, legal services, insurance, real
estate, consulting, and the like -- jobs performed by the high-wage workers
of our modern economy," Rose elaborates.

From the stuff getting expensive the fastest, like hospital stays and elite college tuition, to the prices that are falling the fastest relative to wages, like television and freeze-dried prepared foods, we are paying for people -- just as we always have. The big idea here is that prices follow workers. As the economy leans
more heavily on certain low-productivity sectors like health care to
soak up workers from a growing population and recovering economy, health
care will almost certainly become more expensive. But what if we solve the health care cost crisis? This is the trend we're going to pick up in the next installment of the Prices Are People series: If we make sectors like health care and education cheaper, where will the people go?